Traders vs. Investors, Timing is Everything

What’s the first thing that comes to mind when you think of the stock market? A horde of frantic New Yorkers standing around a trading floor yelling? The daily reports of the Dow Jones being up 30 points or down 20 points? The bold proclamations of Jim Cramer types to BUY, BUY, BUY, or SELL IMMEDIATELY! To be completely honest, these are some of the first images I think of as they are the noisiest and most prominently featured members of the stock market. However, there are actually two main categories of stock market participants, and all of these images are from the first category, traders.

Traders are categorized by their desire to take advantage of the short-term volatility of the stock market to make a quick buck. They don’t care what companies’ stocks they are buying or selling that day. They couldn’t care less if the company has an amazing CEO, a tremendous balance sheet, or an innovative product line. Traders aren’t investing in companies; they’re buying stock that they feel will move up or down in the next few hours or days. They look to technical signals, momentum of stocks, and charts of the short-term movements of different stocks searching for patterns. They look to create outperformance immediately by timing the market, buying and selling stocks in huge quantities, often with holding periods of only a few minutes. These days, many of these traders are actually high-frequency trading algorithms, computers executing trades measured in the milliseconds. Speed is everything for the trader, and timing the market perfectly is the only thing allowing them to make a profit. With traders making such a large impression on how we view the stock market, it’s no wonder we have a fascination with timing the market perfectly. Market timing is notoriously difficult, and, despite the e-trade commercials of golfing on yachts, the vast majority of traders eventually bet wrong. So, is there an alternative?

We would argue there is an entirely different way to participate in the stock market, not as a trader, but as an investor. Investors aren’t looking to buy and sell stocks; investors are working to identify the companies that are going to change the world. Investors are buying companies that change the way we shop, drive, and consume media. Investors dig through balance sheets and find companies with healthy, growing, and sustainable earnings. Investors look for innovative CEOs who have the imagination and vision to turn an online bookstore into the largest retailer in the world. Investors don’t care much about daily momentum indicators; they want to buy a company that will dominate its industry five years from now. At Sage Advisors, we truly believe that keeping the mindset of an investor is one of the most important factors in reaching your financial goals. The next time you find yourself listening to a trader telling you the move to make right now, remember that you’re not a trader, you’re an investor, working in the same field but with a completely different strategy. Arguably the greatest investor of our lifetime, Warren Buffet, put it like this: “If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes… Successful investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time.”